What’s Driving Change in Central Asia’s Car Industry?

The automobile industry can tell us a great deal about Central Asia’s economies.

By Bradley Jardine and Greindl Sibylle for The Diplomat

August 25, 2015

In Central Asia, local car production is scarce while car import markets have provided a vital source of income and mobility to the population. Now, new customs blocs are changing the rules of the game, largely to the detriment of the region. The automobile industry provides an interesting case study for analysts to explore this compendium of problems and choices affecting local markets, governments, and the general population.

Turkmenistan, Surprises at Customs

Since January, customs officers have refused to allow black cars to enter the country. Furthermore, President Gurbanguly Berdymukhammedov announced that all government officials must exchange their black cars for white Mercedes-Benz E300 vehicles.

Entrepreneurs typically import from Dubai’s Al Aweer car market and Germany, with frequent complaints about arbitrary customs rules. Every year brings new restrictions such as a ban on all cars with an engine over 3.5 liters, cars with tinted glass windows, cars older than nine years and so on. In regard to the latter ban imposed in 2009, most Turkmen citizens earn $200 per month and can only afford old, second-hand cars, with the bans effectively curtailing mobility for most of the population.

Turkmenistan is the least dependent on Russian car markets, preferring to import popular brands from the UAE market such as Toyota, Opel, Volkswagen, and BMW. Furthermore, Turkmenistan favors both a totalitarian, planned-economy with little room for markets, and a neutral foreign policy, distancing itself from regional integration projects such as the Eurasian Economic Union.

Uzbekistan, a Vulnerable Producer

Uzbekistan, to a lesser extent, also challenges market forces within its border. Although the state-controlled automobile manufacturer Uzavtosanoat has a joint venture with the American company, General Motors, the 250,000 cars produced in 2014 face little competition on the domestic market. Local importers face huge customs duties, potentially up to the value of the car. Uzbekistanis can do this only when a scarce subscription window opens. They rush to a dealership, order a car, make a down-payment and then wait for up to a year before receiving their car. Buying second hand cuts down the waiting time, however, it usually ends up being more expensive.

Furthermore, the state company has little incentive for appeasing domestic buyers, since its exports receive priority for their potential to bring in hard currency, even if profits are reduced and more at the mercy of trade alliances. In 2011, 87 percent of Uzbekistan’s car exports went to the gigantic Russian market, with 6 percent going to neighboring Kazakhstan. This dependence leaves Uzbekistan vulnerable to Russia’s changing economic partnership.

In 2012, Russia joined the World Trade Organization, with the subsequent recycling duty on Russia’s car imports making Uzbekistan’s exports less competitive. The Eurasian Economic Union (EEU) is also taking its toll on Tashkent: from January 2014, the Matiz and Nexia, popular in Kazakhstan, and produced in Uzbekistan, were banned due to their failure to include daytime headlights and at least one airbag.

Kazakhstan, Hit by Increased Competition

Kazakhstan has long been importing cars from Uzbekistan and further afield, with old German cars being particularly popular. The Eurasian Economic Union has largely stunted these markets, with the banning of the Uzbek-made Matiz and Nexia highlighted above, and a ban on cars manufactured before 2007, undercutting older, but beloved German models. Furthermore, according to the Eurasian Economic Union, cars produced in the economic bloc must include local manufacturing content accounting for at least 30 percent of the product, and set to increase to 50 percent by 2018.

Timely enough, Toyota started to assemble its Fortuner in Kazakhstan at the start of 2014, with the government stimulating demand for these and other locally produced, foreign brands. In April 2015, Astana launched a program whereby loans at 4 percent interest could be obtained in order to buy cars. After several months, most of the money transferred from the Kazakh Development Bank to commercial banks for this project had been used up.

As a result of Russia’s currency crisis and Kazakhstan’s exposure to the Russian economy within the Eurasian Economic Union, many Kazakh citizens have been taking advantage of the low ruble and buying their cars in Russia. This is significant, since prior to crisis, Kazakhstan had already been a huge consumer of Russia’s car exports, buying up 88,000 of the 142,000 cars exported from the Russian Federation in 2013.

Kyrgyzstan, a Declining Imports Market

Kyrgyzstan was the region’s only member of the WTO until Tajikistan joined in 2013, and functioned as a re-export bridge into Central Asia, bringing in cars from Germany, South Korea, Japan, and the United States. Until 2015, car sales to buyers across the region had been increasing, rising from 91,523 in 2013 to 106,700 in 2014.

In January 2015, the State Statistics Committee reported a significant decline in car imports. The once-thriving Azamat car market outside Bishkek has suffered greatly. Car imports plummeted to just 383 for the first two months of 2015, a tiny fraction of the 13,000 imported in the same period in 2014.

This trend was largely the result of the EEU’s required tariff hikes for January 1, which essentially meant that the older the car, the more expensive it would be to import. For example, customs duties for passenger vehicles older than 10 years, which accounted for 60 percent of annual imports, grew to $2.6 U.S. dollars per cubic centimeter (cc) on January 1, 6.5 times higher than the previous $0.4. These tariffs vary according to the age and power of the vehicle, but are generally subject to a $0.5/cc annual increase up until 2019.

In the short to medium term, the negative effects of the change have been offset slightly by the huge stock of over 100,000 used cars in the country, which should cater to the local markets for another 5 years. Once this stock is depleted, Russian cars will begin to flood the market, largely mirroring the trends in Kazakhstan.

Kazakhstan, Kyrgyzstan, and Uzbekistan have long played with customs rules to benefit their domestic markets. Since 2012, with Russia’s accession to the WTO and the creation of the Eurasian Economic Union in 2015 have restricted Central Asia’s maneuverability. Will domestic industries be able to produce an affordable, local alternative to Russian exports?

Bradley Jardine is a regular contributor to The Diplomat’s Crossroads Asia blog.

Greindl Sibylle graduated from Université Catholique de Louvain and IE Business School with Masters in Philology and International Relations. After a stint in the European Institutions, she is now working as a freelance journalist with an interest in Central Asia.